Japan survey finds business sentiment improving

TOKYO 
Japanese manufacturers are more upbeat about business conditions than they were late last year, but less so than expected, a central bank survey found.

The Bank of Japan's "tankan" index for the March quarter rose to minus 8 from minus 12 for large manufacturers, a smaller improvement than analysts had anticipated before Monday's release. A reading below zero means pessimists outnumber optimists, and the tankan forecast for large manufacturers for the June survey was minus 1.

Large firms said they plan to reduce capital spending in the fiscal year that begins Monday by 2 percent, suggesting manufacturers may be unconvinced lax demand is on the rebound, despite aggressive stimulus measures by the government and central bank.

Large nonmanufacturing companies were more positive, at positive 6, up from 4 in December. Smaller nonmanufacturers were less optimistic, at minus 8, up from minus 11 in the previous survey.

The central bank will hold its first policy meeting under a new governor, former Asian Development Bank President Haruhiko Kuroda, later this week. The weak business outlook could spur fresh moves to ease monetary conditions, possibly by increasing BOJ asset purchases or extending the range of maturities for the government bonds it buys.

"It is a near certainty that at least one of the two Board meetings in April will result in some form of additional monetary easing," Capital Economics said in a commentary issued before the tankan's release.

While increased government spending and monetary easing appear to be giving the economy a boost after years of stagnation, economists say longer-term reforms are needed to counter weakening demand due to Japan's aging and shrinking population and excess capacity.

Kuroda has pledged to do whatever he can as central bank governor to help achieve a 2 percent inflation goal demanded by Prime Minister Shinzo Abe and end the long bout of deflation, or declining prices, that has discouraged companies from investing more in the domestic economy.

The tankan survey of 10,698 companies, 98.9 percent of which responded, showed the outlook for smaller manufacturers edging slightly lower, to minus 19 from minus 18.

While public works spending will also raise demand and create jobs, the government's longer term strategy for economic revival after more than two decades of stagnation hinges on convincing both companies and consumers to spend more to boost domestic demand.

Japan has relied heavily on export manufacturing to drive growth. But the economy has suffered thanks to weak global demand due to the financial crisis. Many manufacturers have shifted production to less-costly overseas locations to help blunt the impact of the strong Japanese yen, reducing the potential positive impact on exports from the yen's weakening over the past half-year. Meanwhile, the weaker yen has raised costs in yen for imported energy and commodities.